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A company's cash plays a huge factor in whether the business will survive. Even if you have a business that shows a profit, you must have the cash flow to match if the business is to earn money and run operations smoothly. Foreseeing cash flow needs is half the battle in dealing with a cash flow issue.

Identification

For businesses, cash flow refers to how much hard money goes in and out of a company's budget. Spending $5,000 on operating expenses and deposits of $4,000, for instance, results in a net negative cash flow of $1,000.

Misconceptions

Profits and cash flow are not the same thing. Profits are money that the business ends up earning after expenses and taxes, while cash flow is money available to use for operating expenses. Take, for instance, Company X. Even if it has guaranteed profits in month six of $10,000, it still needs cash flow in month one to get to those sales. The reverse can happen. A manufacturer might sell off expensive equipment because nobody wants its products. It would have high cash flow because of the sale, but low profits because it cannot produce items to make a profit.

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Types

Cash flow goes in and out of a business. Cash inflow occurs when a company receives money. This can come from customer sales, borrowing money from a bank or investors buying stock.

Cash outflow means a company transfers money out of the budget. Payroll, supplies and legal expenses are common examples of cash outflow. Purchases on credit, however, are not considered cash outflow until the company actually pays hard cash on the debt.

Calculating Cash Flow

The most basic calculation of monthly cash flow takes into account the starting amount of capital in the budget, cash inflow, cash outflow and the ending balance.

A long-term cash flow report factors in anticipated cash inflow and expenses. Calculating long-term cash flow is much more difficult than short-term because of unknown variables that could pop up, such as a sudden spike in demand that requires hiring more employees.

Tip

Decreasing the time between sales and when you receive payment immediately boosts cash flow. Entrepreneur.com recommends prompt invoices and contacting the customer if he is slow to pay. Consider offering discounts to customers who pay in cash.

Improving sales can muddle your cash flow analysis. Watch expenses; if they increase at a faster rate than sales, take quick action to control them. Entrepreneur.com suggests delaying payment to suppliers as late as possible and working with vendors who may extended payment deadlines.

References

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About the Author

Russell Huebsch has written freelance articles covering a range of topics from basketball to politics in print and online publications. He graduated from Baylor University in 2009 with a Bachelor of Arts degree in political science.